Tullis v. Umb Bank, N.A.

464 F.Supp.2d 725

David H. TULLIS, et al., Plaintiffs, v. UMB BANK, N.A., et al., Defendants.

No. 3:06 CV 7029.

United States District Court, N.D. Ohio, Western Division.

November 21, 2006.

COPYRIGHT MATERIAL OMITTED

Gregory R. Elder, James M. Tuschman, Marvin A. Robon, Barkan & Robon, Maumee, OH, for Plaintiffs.

Amy L. Phillips, Brendon P. Friesen, Jeffrey M. Embleton, Mansour Gavin Gerlack & Manos, Cleveland, OH, Mark C. Abramson, Scott A. Haselman, Robison, Curphey & O'Connell, Toledo, OH, for Defendants.

MEMORANDUM OPINION AND ORDER

ZOUHARY, District Judge.

This matter is before the Court on Defendant's Motion to Dismiss (Doc. No. 20), to which Plaintiffs filed a Memorandum in Opposition (Doc. No. 31), and Defendant filed a Reply (Doc. No. 33). The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1331.

BACKGROUND

Plaintiffs David Tullis and Michael Mack are two medical doctors who maintained pension funds through the Toledo Clinic Employees' 401(k) Profit Sharing Plan (the Plan), an ERISA-governed pension plan. Defendant UMB Bank, N.A., was the Trustee for the Plan. Plaintiffs' accounts, while administered by Defendant, were completely self-directed.

In the early 1990s, Plaintiffs engaged the services of William Davis (Davis), of Continental Capital Corporation (CCC), as their investment advisor. Davis, acting as each Plaintiffs agent, made various investments with Plaintiffs' pension funds. In October 1999, the SEC entered a Temporary Restraining Order against CCC because two of its securities brokers engaged in fraudulent activities. Plaintiffs contend that Defendant knew of these fraudulent activities, but failed to inform Plaintiffs (Compl.¶ 21).

In April 2001, Defendant filed suit against Davis and a subsidiary of CCC on behalf of other Plan participants (Compl.¶ 24(e)). That suit alleged that several investments made by Davis were not liquid, had rapidly declined in value, had no marketability, or were non-existent. Plaintiffs contend that Defendant again failed to inform them of Davis' or CCC's fraudulent activities. Id. Consequently, Plaintiffs continued to rely on Davis and CCC. Further, Defendant continued to accept and honor allegedly forged investment directives from Davis without consulting or warning Plaintiffs.

In Spring 2003, CCC and its related entities stopped doing business, and were subsequently taken over by the Security Investor Protection Program. A bankruptcy trustee has since been appointed to liquidate and distribute CCC's assets, and Davis recently pled guilty to twenty-five criminal counts relating to his fraudulent activities.

Plaintiffs allege that as result of Davis' activities, their pension accounts have incurred significant losses. Specifically, Plaintiff Tullis alleges that as of February 28, 2003, Defendant represented the value of Tullis' retirement assets to be $724,561.29, while their actual value was $142,269.41, a difference of $582,291.88 (Compl.¶ 13). Plaintiff Mack contends that on July 1, 2001, Defendant represented the value of his retirement assets to be $1,613,407.87 (Compl¶ 14). However, when Mack attempted to withdraw his assets upon retirement, those assets turned out to be worth only $420,793.57, a difference of $1,192,614.30 (Compl¶¶ 14-15).

Plaintiffs initially sued Davis, CCC, Defendant, and others in the Lucas County Court of Common Pleas, Case Nos. CI0200302954 and CI0200303694. Those cases were stayed as a result of various bankruptcy proceedings, so Plaintiffs dismissed Defendant from those suits and filed the instant action. Here, Plaintiffs allege six causes of action: (1) "Breach of Fiduciary Duty;" (2) "Additional Breaches of Fiduciary Duty, Violation of ERISA & Negligence;" (3) "Negligence, Failure to Warn & Additional Breaches of Fiduciary Duty;" (4) "Bogus Investments, Breaches of Fiduciary Duty & Fraud;" (5) "Fraud, Misrepresentation and Negligent Misrepresentation;" and (6) "Violation of Securities Law."

Plaintiffs defend the Motion to Dismiss with three legal theories (Plaintiffs' Mem. Opp. P. 1):

1. ERISA permits Plaintiffs to bring suit as the affected subclass of the pension plan and all authority cited by Defendant UMB Bank, N.A. applies exclusively to defined benefit plans not implicated in this controversy.

2. Plaintiffs also have a claim for equitable relief under 29 U.S. C . § 1132(a)(1)(B) which Defendant UMB Bank, N.A. failed to discuss and is unaffected by the case authority cited by Defendant.

3. Defendant UMB Bank, N.A. committed repeated violations of the Securities Exchange Act of 1934, Section 10b-5 and Plaintiffs' claims are unaffected by the case authority cited by Defendant UMB Bank, N.A.

Plaintiffs' first two theories of recovery are without merit and must be dismissed. Plaintiffs' Securities Exchange Act claim does not meet the pleading requirements imposed by the Private Securities Litigation Reform Act and must be dismissed. Further, Plaintiffs' state-law causes of action are preempted by ERISA. Accordingly, Defendant's Motion to Dismiss is granted.

DISCUSSION

1. Standard of Review

When deciding a Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(6), the function of the Court is to test the legal sufficiency of the Complaint. In scrutinizing the Complaint, the Court is required to accept the allegations stated in the Complaint as true, Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984), while viewing the Complaint in a light most favorable to Plaintiffs, Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974); Westlake v. Lucas, 537 F.2d 857, 858 (6th Cir.1976). The Court is without authority to dismiss the claims unless it can be demonstrated beyond a doubt that Plaintiffs can prove no set of facts that would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Westlake, 537 F.2d at 858. See generally 2 JAMES W. MOORE, MOORE'S FEDERAL PRACTICE, § 12.34[1] (3d ed.2003).

2. Plaintiffs' State-Law Claims

ERISA preempts all state laws "insofar as they may now or hereafter relate to any employee benefit plan...." 29 U.S.C. § 1144(a). "Congress' intent in enacting ERISA was to completely preempt the area of employee benefit plans and to make regulation of benefit plans solely a federal concern.... Virtually all state law claims relating to an employee benefit plan are preempted by ERISA. It is not the label placed on a state law claim that determines whether it is preempted, but whether in essence such a claim is for the recovery of an ERISA plan benefit." Cromwell v. Equicor-Equitable HCA Corp., 944 F.2d 1272, 1276 (6th Cir.1991) (internal citations omitted).

Plaintiffs have alleged several state-law causes of action, including breach of fiduciary duty, negligence, failure to warn, fraud, negligent misrepresentation, and violation of Ohio securities laws. Each of these claims is clearly related to the Plan, and Plaintiffs essentially conceded this point when they declined to dispute preemption in their Memorandum in Opposition. Accordingly, Plaintiffs state-law claims are preempted by ERISA, and therefore dismissed.

3. Breach of Fiduciary Duty under ERISA

Plaintiffs claim that Defendant breached its duty as an ERISA fiduciary, resulting in significant losses to Plaintiffs' pension accounts. ERISA specifically allows the Secretary of Labor, or a participant, beneficiary, or fiduciary, to bring a civil action seeking relief for the plan for a breach of fiduciary duty. 29 U.S.C. § 1132(a)(2).¹ 29 U.S.C. § 1109 establishes the specifics of an ERISA breach of fiduciary duty claim:

(a) Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary....

Thus, "[p]lan fiduciaries who breach any of their ERISA-imposed responsibilities, obligations, or duties may be held personally liable for damages, for restitution, and for 'such other equitable and remedial relief as the court may deem appropriate.'" Pfahler v. National Latex Co., 405 F.Supp.2d 839, 843 (N.D.Ohio 2005) (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 252, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993)). "In ERISA, Congress sought to provide fair and generous remedies for plan participants without imposing ruinous personal liability on plan fiduciaries." LaRue v. DeWolff, Boberg & Assocs., 458 F.3d 359, 364 (4th Cir.2006).

Plaintiffs, as two Plan beneficiaries, seek to impose liability on Defendant, an ERISA "fiduciary," for breaching its duty. Specifically, Plaintiffs seek compensatory damages to remunerate for the losses incurred by their individual pension accounts. This form of recovery, however, is prohibited by ERISA. Specifically, pursuant to § 1109, a fiduciary is only liable for "any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary." 29 U.S.C. § 1109(a) (emphasis added). Indeed, "Section [1132(a)(2) ] actions for breach of fiduciary duty must be brought `in a representative capacity on behalf of the plan as a whole' and recovery for a breach of fiduciary duty `inures to the benefit of the plan as a whole.'" Pfahler, 405 F.Supp.2d at 843 (quoting Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140-43, n. 9, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985)).

To circumvent this requirement, Plaintiffs claim to be suing on behalf of a "subclass" of the Plan, namely themselves. Plaintiffs rely on the Sixth Circuit decision in ...